Small investors can bet like county retirement fund

Update:Brian White, chief executive of the pension system, called me to say the county pension system's does not use Salient's mutual funds, because they are more expensive than the county's fee deal. In a previous version of this column I said, incorrectly, that Salient was permitted to invest county money using its mutual funds, but had not done so. Also, I am guilty of a horrid transposition: The county's unfunded liability is actually $2.45 billion, NOT $4.25 billion.

Now you, too, can invest like San Diego County’s leveraged pension fund — although I certainly don't advise it.

A family of mutual funds offered by Houston-based Salient Partners allows small investors to use “risk parity,” “trend following” and other alternative strategies in hopes of boosting returns or diversifying portfolio risk.

To be sure, Salient has plenty of competitors. Similar funds under the heading “tactical allocation” are available from much larger managers like Blackrock or Deutsche Bank.

But Salient’s funds are managed by Lee Partridge; the same Lee Partridge hired in October 2009 by San Diego County’s public pension board to manage its retirement fund.

In a policy change that took effect July 1, the board authorized Partridge to increase his use of leverage and derivatives to diversify its portfolio and raise potential investment risks in hopes of boosting returns to make up for a $2.45 billion funding shortfall.

Key elements of the county’s new approach closely resemble those of Salient mutual funds.

Risk parity is the most prominent example.

The county has allocated 20 percent of its $10 billion portfolio to the strategy, which uses derivatives tied to price movements of foreign and domestic stocks, bonds and commodities. Partridge is authorized to employ a 400 percent leverage level, which means the $2 billion “risk parity sleeve” could place $10 billion at risk in the markets — essentially the entire retirement fund.

For smaller investors, the Salient Risk Parity Fund may use an unspecified amount of leverage, according to its prospectus.

Investments include a wide variety of derivatives such as futures contracts, currency options and swaps. The document says that, in some circumstances, losses could exceed the total value of the fund.

I tried to ask Partridge whether the county’s money is also at risk of total losses, but through a spokeswoman he declined to comment.

The Salient mutual fund is more expensive than most: For a minimum investment of $2,500 in Class A shares, there is an initial sales charge of 5.5 percent, along with a 1.62 percent annual fee. Discounts are available to large investors.

For the county’s fund, Salient charges a fee of 0.10 percent of the total fund, or about $10 million this year.

As for performance, Salient’s risk parity mutual fund lost 10 percent (before taxes) of its value in 2013, according to company documents.

Returns have been positive lately, with the fund posting a gain of 8.27 percent after taxes and expenses in the 12 months ended June 30, according to Morningstar, a rating agency. It has earned 1.56 percent a year since its November 2012 inception.